Flow-Driven ESG Returns

Format:Print
| Language:English
| Pages:57

Abstract

I show that the recent returns to ESG investing are strongly driven by price impact from flows towards ESG funds. Using data on institutional trades, I estimate the market’s ability to accommodate the demand of ESG funds, which is given by the elasticity of substitution between ESG and other stocks. I show that every dollar flowing towards ESG stocks increases their aggregate market value by $0.7. Using a novel measure of total ESG flows, I estimate an annual flow-driven ESG return of 2.07%. In the absence of flows, ESG funds would have not outperformed the market from 2017 to 2022.